Anthony Clark

Planting seeds at Zeder

The doyen of the listed agricultural investment space on the JSE has been Zeder Investments. PSG Group owns 44% of it. Listed in 2006, Zeder is widely regarded as the catalyst that prompted much of the shake-up and value unlock among SA’s many old agricultural co-operative structures. These had been largely overlooked by investors — mainly because of perceptions that the agricultural sector was an investment backwater and because the shares in even the biggest co-ops were not easily available.

These companies traded at massive discounts to their NAVs and had very low earnings multiples. Some even had valuable undervalued legacy stakes (for instance, shares in entities that eventually became Pioneer Foods).

This combination of undervalued asset opaqueness led to Zeder accumulating stakes in many counters such as Kaap Agri, Senwes, BKB, KLK and the like — such deal-making was the foundation of its growth.

For years Zeder was the prime mover and shaker in the sector and rose at its market valuation height to near R15bn. Today it’s valued at R7.9bn.

Zeder angled to become the single largest shareholder in SA’s second-largest food business, Pioneer Foods. The acquisition of a holding company named Agri Voedsel in 2014 saw Zeder emerging with a 28% “kingmaker” stake in Pioneer.

Pioneer was Zeder’s strength, but later its Achilles heel.

As it grew to be dominant in Zeder’s sum-of-the-parts (SOTP) valuation, it dwarfed the other assets. Pioneer often comprised more than two-thirds of the portfolio, and sometimes represented even as much as 80% of Zeder’s market capitalisation.

With the deterioration in the SA economy and resultant consumer weakness, Pioneer’s profits and earnings started to buckle three years ago. From a share price high of R230 it fell to its 2019 low of R67. That deterioration hit Zeder’s SOTP valuation hard, widening its discount — at one point near 40% — and resulting in its share price more than halving to a recent 2019 low of 337c.

Zeder’s saving grace is a takeover bid by beverage and foods business PepsiCo for Pioneer Foods. Zeder agreed to sell its stake for R110 a share (worth R6.4bn), and many local institutional shareholders also took the offer, as it represented a 56% premium to the weak

“With the deterioration in the economy, Pioneer’s profits and earnings started to buckle three years ago

Pioneer Foods trading price. The R25bn offer is awaiting regulatory approval.

Zeder’s share price has run hard as the group confirmed it would pay a significant proportion of the PepsiCo proceeds back to shareholders, PSG being the largest.

Sans Pioneer, Zeder’s portfolio will consist of stakes in two JSElisted stocks, Kaap Agri and Quantum Foods, as well as few unlisted investments like Capespan, the Logistics Group and Zaad. Zeder will be debt free with a small war chest. But it will be a shadow of its former self.

Why do I think Zeder should sell the farm? PSG is the controlling shareholder, and it will have cash back from Zeder. Will PSG have any enthusiasm for an investment company with a portfolio of illiquid, misunderstood, cyclical agricultural assets?

The Zeder SOTP discount remains a stubborn 27%. The market clearly is not interested.

I reiterate my call for a delisting, with PSG taking the counter in-house. This way the long-cycle nature of Zeder’s remaining assets can be nurtured, developed and harvested in their own good time. The market simply does not have that long-term vision.

Should Zeder remain listed, the discount on SOTP will remain wide. I doubt PSG will pay the SOTP value (currently 634c a share including Pioneer Foods). PSG may want Zeder to soften further, and wait until early 2020 to make a move. ●